Dell: the good, the bad, and the ugly

A drop below $20 could send Dell back to pre-teen levels

NEW YORK (CBS.MW) - There is good news and bad news about the 19 percent plummet in Dell Computer's stock on Friday. The good news is first support is close; the bad news is support is close. If support breaks, the stock may fall to pre-teen levels. But even if it doesn't, bears have left a minefield of "gaps" along the way to slow down any rallies.

First, the good news

The good news is Dell bulls don't have to pull back much before they get some historical help. Terry Gabriel, technical strategist at IDEAglobal, says there is a support zone for the stock
DELL
between $22.06 and $20.38. That range encompasses its 52-week low ($22.06) set during the week ended Oct. 13, and the low during the week ended Oct. 9, 1998 ($20.38).

If something works, you keep doing it until it stops working. With that in mind, technical analysts look at previous lows (or highs) as support (or resistance). If bulls were able to deflect a bear attack at a level once - and especially if its more than once - they should be willing to take another crack at it. And if you notice, the rejection of the lows during those weeks was decisive.

Now the bad news

If, however, this support zone fails to hold back the on-rushing bears, Dell's stock could regress back to adolescent levels. Gabriel sees the next major area of support, when looking at a monthly chart, between $12.98 and $12.03.

Way back at the end of 1997 and the very beginning of 1998, bulls and bears battled it out for over 5 months, keeping the stock locked in a tight range. Then in February 1998, bulls made a definitive mover higher. In their wake, they left a shelf with a total of 4 monthly highs with a $12 handle: September 1997's $12.66; October's $12.98; December's $12.03; and January 1998's $12.63. In February, the stock closed up 41 percent for the month and never looked back.

Markets tend to pause when revisiting heavy congestion areas, no matter how long ago they were. Losers are very adept at learning from their mistakes and tend to have very long memories. Bears battled to cap Dell's progress at the end of 1997, and may not want to sell at those levels again. In turn, bulls will look back at hard-fought victories fondly, especially when things in the present look so negative.

The good, bad, and now the ugly

Even if the first support manages to hold, the scenery doesn't get any prettier. Although the stock managed to stay above the low hit in October, bears nearly took back in three trading days the ground it took bulls 19 days to acquire. Bears were particularly vicious on Thursday and Friday, littering the trail with two daunting gaps.

A trading gap is an uncharted area, separating a time frame's low (or high) from the following time period's high (or low). Not all gaps are technically significant. Some occur within periods of consolidation when volume is light; those gaps are usually filled, or covered, rather quickly. Ones that occur in the continuation, or in the reverse of a strong trend, or those that come at the end of consolidation are notable.

On Monday and Tuesday of last week, Dell's stock came to a screeching halt following a string of 7-straight positive closes. The days' trading ranges were nearly identical ($33.00-$30.88, $33.06-$30.88). There's nothing wrong with taking a breather, as long as you're willing to continue the move right afterwards. Instead, Wednesday's 6.9 percent drop acted like a hard body blow to bulls, taking their breath away.

Once the stock gapped lower on Thursday, bulls were beaten. They were reluctant to give in, however, and fought hard to close ($28.38) well above the intraday low ($26.94). Judging by Friday's volume of 122 million shares - roughly 4-times the daily average - it appears even the skeptics have jumped on board.

When a market tries to retrace recent losses, these breakout gaps act as strong resistance. Bulls that bought at Thursday's low were stunned by Friday's decline. Losers, especially ones left with their mouths gaping open, are usually content to sell out their positions at break even levels.

If bulls manage to close that gap, there's one right behind it. Wednesday's low ($30.25) should be just as tough to negotiate.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.